To fulfill the materiality requirement there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.
The antifraud provisions of Securities and Exchange Commission (SEC), a rule issued by the SEC pursuant to 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) -generally prohibit, in connection with the purchase or sale of any security, misleading statements of material fact. In the case at hand, the representatives of one company had meetings and telephone conversations with the officers of another (the "target" company), concerning the possibility of a merger. In 1977 and 1978, during the pendency of these discussions, the target company made three public statements, the first of which denied that the company was engaged in merger "negotiations," and the latter two of which said, in effect, that the company knew of no company developments that would explain the abnormally high trading activity and price fluctuations in the company's stock. In the United States District Court for the Northern District of Ohio, former target company shareholders who had sold their stock, after the first public denial and before the trading suspension, filed against the target company and its directors a class action which alleged that the company and its directors had issued three false or misleading public statements in violation of the anti-fraud provisions of the SEC. District Court granted summary judgment to the company and its directors, on the ground that the alleged misstatements were immaterial. This was reversed by the Court of Appeals which expressed the view that, under the circumstances, the target company had the duty to disclose certain omitted facts about the merger discussions and that the omitted facts were material.
Did the Court of Appeals correctly hold that the target company had the duty to disclose certain omitted facts which were material to the merger discussions?
The judgment of the court of appeals was vacated, and the case was remanded for further proceedings. The Court held that an omitted fact was material if a reasonable shareholder would consider it important in making his or her vote and this standard should be applied to all § 10(b) and Rule 10b-5 actions. The Court also held that materiality required a case by case review of the facts and that a rebuttable presumption existed that stockholders relied on available information when buying or selling securities.